I think it's helpful to classify bbt bad loans into 2 general categories - unsecured loans and secured loans. Unsecured loans are for the most part specialized lending, credit cards, sales finance, and retail. These loans have very high loss severity rates of 90%.
Secured loans are mortgages and commercial. These loans have relatively low loss severity rates. Historically, the loss severity rates have been in the 10 to 20% area but I think currently are running about 25 to 50%. Probably 35% is a good average.
Last quarter bbt net chargeoffs were $388 million with the chargeoffs divided almost equally between unsecured and secured loans.
Current trends are interesting. Unsecured "stressed loans" at 3/31/09 (consisting of nonaccruals, plus 90 day delinquencies and 30 to 89 day delinquencies) dropped 10% from 12/31/08. Therefore, I think it's very likely that net chargeoffs in 2nd qtr. 09 for unsecured loans will be $200 million or less. Also, I think it's very likely that the unsecured component of the loan loss provision will be $200 million or less.
Last qtr. bbt's loan loss provision was $676 million. That's a huge number considering that the unsecured component is $200 million or less leaving a secured component of about $476 million. Assuming a loss severity rate of 35%, a loan loss provision for secured loans of $476 million equates to $1.4 billion of secured loans going bad which is almost 100% of the 3/31/09 nonaccrual balance!
Secured "stressed loans" appear to be topping out. Last quarter they increased 6% from 12/31/08 with the 90 day plus accruing and 30 to 89 day categories showing significant improvement.
So what's bbt going to do in the 2nd qtr 09?
Accrue another $476 million of provision for bad unsecured loans which equates to another $1.4 billion of secured loans are bad? Should that be the case, it seems to me that bbt will have enough reserve for secured bad loans to cover 100% of nonacrruals, 90 day plus delinquencies and 30 to 89 day delinquencies.
Of course, the big assumption is 35% loss severity rate which is more than twice as high as the historic average. But with the housing market apparently reaching a bottom with housing shortages beginning to develop in certain localities, I'm comfortable with 35%.
there is nothing wrong with that strategy -- scalping trades for extra cash is a bonus and is nice to help the cause
i think as long as there is an eventual crash, you won't ever get caught holding the bag on the FAZ trade
i would jettison the longs at overly high priced S&P points -- the market ain't gonna run away from you to the upside after a 50% gain off the MARCH LOW
"Unsecured loans are for the most part specialized lending, credit cards, sales finance, and retail. These loans have very high loss severity rates of 90%."
I can't believe the loss rate could possibly be that high on these unsecured loans. Can this be verified?
Can this be verified?
No because it depends on the point of reference in the loans used. What do I mean?
Losses on defaulted structured securities typically accrue over time because of additional missed interest and
write-downs on the securities. Consequently, the amount of final losses is known only for matured defaults, where the
term “mature” means zero outstanding principal balance. Final loss severity rates on non-matured defaults – defaults
with positive principal balances outstanding – cannot be known with any certainty.
Loss severity measured at the default date exceeds loss severity measured at origination, primarily because a structured
security may distribute a substantial portion of its principal to investors prior to its default, and secondarily because the
present value of lifetime losses is lower at origination than at default due to discounting. By contrast, for a corporate
security, the difference between loss severity at origination and loss severity at default is generally less substantial – it is
limited to the discounting effect – because its balance at origination is generally equal to its balance at default.
To measure the overall average loss severity on defaulted structured finance securities, it is necessary to adopt a method for estimating
ultimate loss severity rates on defaulted securities that have not yet matured.
Well one approach to estimating lifetime cumulative losses on non-matured securities is to
infer their loss severity rates directly from a small number of characteristic factors at the time of default. These factors provide
only static information about the defaulted security – such as tranche size, seniority, and the number of months from
origination to default – to infer a loss severity rate on a non-matured security. The static approach, which relies on an
estimated relationship between the static factors and final loss severity rates using only matured defaults, is likely to
impart an upward bias on expected loss severities. The reason many securities in the matured sample became mature is
because they experienced large losses and their balances were rapidly written down to zero. In contrast, the reason
many of the non-matured securities have not matured is that their loss experience has been less severe.
Or another approach to estimating lifetime cumulative losses on the non-matured securities
relies primarily on the ratio of losses realized to date versus total principal balance reduced since the default date to predict a security’s final
cumulative losses. The total principal balance reduced since the default date includes principal that was lost and principal that
was paid from default date to the current date. The basic idea is that as a defaulted security’s principal balance declines over
time, the share of this balance that is reduced through losses, as opposed to the share that is reduced through principal distribution
to investors, reveals the rate at which the security is likely to suffer losses on its remaining balance.
Or a final approach blending the two together and weighting static and dynamic estimates of final loss severity rate, with the relative weight varying over the life of the
With a long winded answer copied from an old Moody's study. . .yes 90% loss severity rate is "reasonable".
I wait for a period, usually a couple of days, where the S&P makes a good move, usually 2 to 3 %, and then I buy 2,000 shares of FAZ and sell for hopefully a $.50 gain. Not much money, but it does give me some cash flow. It's worked so far, but who knows in the future.
The good thing is I have Both an S&P that's close to the 1,000 level I feel is around its longer term high mark and FAZ that is giving me the a trade in the downside of the financials which I feel is a longer term sure thing.
here it is, the message post of the year, this guy is gonna be right -- i am not sure that industrials will fall off as much as the others, so if i am in doubt, i just leave that one out, cuz there is plenty of others he posted that will be winners
i have spoken of all of his recommendations before -- this guy is a genius and is gonna make so much money on those trades -- after these trades, i am gonna let him funk my sister
" Have you noticed how some of the worst real estate related balance sheet companies (CBG for example) have done so well with their share price? "
I'm in the ultra short position vs a standard short. Average rent charged across the country is dropping, value of property dropping, asinine amount of inventory in the market, unemployment still rising. . .on and on. Commercial leg still has to be chopped off before this sector hits the bottom. I'll definitely put more emphasis into the trade when rates start rising.
For foreign currency - I believe in continued commodity inflation as well as a carry trade. Trades like BZF which invests in the Brazilian real or FXA the Australian dollar have been the easiest way I have found to make the play. Resource rich countries with relatively higher interest rates seem like a logical play and hedge against the demise of the dollar. You could short the dollar to further the gains if you wanted to, I'm waiting for inflation to start running before beginning that leg of the trade.
TIPS. . .I've simply parked cash there. No sense in letting inflation eat away at my money under the mattress. The fed is hell bent on leaving rates at 0% until hyperinflation ramps up and is uncontrollable. . .I simply hope I'm ready. Gold is too volatile to park cash in for me yet is a small portion of my portfolio.
Australia - Try the holdings for EWA (Ishares EFT) for Australia as a starting point. The ETF weighting is too heavy in financials however that may not be a bad thing over the haul.
Best of luck.
From my perspective you are close to dead on Jeff.
Only change I have is, I don't think we are going to see much deflation going forward. Stagflation, yes. . .inflation definitely.
Because of my inflationary views I like, TIPS, foreign currency, resource based ETF funds like Brazil (EWZ) and Australia and short term bonds.
Over the next 5 years I find it hard to believe the dollar will hold up. I also feel foreign investors will begin sell American debt rather than continue to buy it.
BTW, I'm not waiting to get into gold. I presently have 3% of my assets in gold, but that could increase anytime I feel is the right time. I also have 7% of my assets in stocks with another 8% ready to invest whenever I feel the time is right. But I feel cash is the place to have a good amount of assets because right now cash IS king.